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The confusing investment path to saving the planet



When Cambridge university said this month that its £3.5bn endowment fund would finally pull out of fossil fuel investments, the fund’s chief investment officer Tilly Franklin said they were trying to “align our investment strategy with the science”.

Cambridge is hardly alone in this attempt. As companies, cities and even whole countries pledge to have net zero emissions before 2050 to help keep global warming from rising to dangerous levels, investors are increasingly asking whether their portfolios are climate-change friendly. 

The Covid-19 pandemic this year appears to have only hastened that trend. Far from turning investors away from environmental, social and governance (ESG) investing, the crisis has heightened interest in sustainable portfolios in general. A survey this month by RBC Global Asset Management found that the pandemic had led more than a quarter of professional investors to place more importance on ESG considerations.

Climate-aware funds, a subset of the ESG funds that have been growing in popularity with investors, including retail savers, have attracted a larger proportion of the total flows into ESG funds this year than ever before. In the nine months to the end of September, new money going into climate-aware funds totalled nearly €37bn out of total sustainable fund inflows of €134bn — just over a quarter, data from Morningstar, the funds research company, show. The previous year, this proportion was just 15 per cent, with flows significantly lower too at €12bn. 

“Climate change has never been so prominent in the minds of [investment] product manufacturers,” says Hortense Bioy, director of passive funds and sustainability research in Europe for Morningstar. “They’re responding to the ever-growing demand for products that help reduce climate risk in investment portfolios and/or promote the transition to a low-carbon economy.”

However, climate change funds can be confusing. There is not yet a standard classification: Morningstar has loosely identified six types, including low carbon, ex-fossil fuel and climate solutions, but it’s not always clear what sort of companies the funds hold. 

Some funds simply invest in best-in-class companies: they might opt for the least polluting oil and gas company, or the traditional car manufacturer investing the most in electric vehicles. Or they might be investing in companies that have nothing to do with climate change as such but have set ambitious emissions targets: Retailer H&M and Microsoft, for example, are frequently held by so-called ex-fossil fuel funds. Or they might be investing in companies whose main business is cutting carbon emissions: an agritech company such as Trimble Navigation, for example, which produces software to make agriculture more efficient, or an alternative meat company such as Beyond Meat.

How green is your fund?

A big part of the confusion for investors trying to make their portfolios more climate-friendly is how their own approach may differ from that of the fund managers they use. Most climate-aware retail investors want to ditch oil and gas stocks from the portfolios as a first port of call. But this decision isn’t as simple as it might seem.

To start with, these companies have historically been good dividend payers so are a mainstay of many income funds. Ditching them, or the funds that hold them, could lead to a loss of income in the short term. That may not matter for many investors, who simply don’t want to hold such companies at all. But selling oil and gas shares may not damage the companies either. Bill Gates told this newspaper in 2019 that: “Divestment, to date, probably has reduced about zero tonnes of emissions.” Some fear that selling shares in fossil fuel companies may ease their conscience, but won’t effect change, as there are usually other less scrupulous investors willing to buy them. 

But others argue that the real reason to divest is not because of your conscience, or to hurt the oil and gas companies: it is a rational investment decision. In a world where government regulation against heavy polluters is getting stricter and traditional oil and gas companies are seeing their business models under threat, it simply makes good financial sense not to invest in them, the argument goes. Many professional investors now believe that any investor who is not acting with climate change in mind could be exposing themselves to serious risk. 

MSCI, the index provider, said this year that all investors — not just sustainable investors — should incorporate ESG principles in their investments to mitigate the risks of climate change. Its head of ESG, Remy Pascal, predicts a “revolution” where within a few years it will become the norm for investors to hold ESG funds.

Yet, for now, it’s hard to calculate the risk of not having a climate-friendly investment portfolio. The UN’s Principles for Responsible Investment (PRI) body has warned that financial markets haven’t worked out how to price so-called climate transition risk: the cost to companies adapting their business models to a low carbon environment and the government policies that will hasten that process along. It warns that not only will such policy change accelerate — with the bulk of it predicted to come in 2023-5 — it will be sudden and forceful as governments realise they should have acted sooner, causing a sharp shock for polluting companies.

Financial markets around the world have not priced in a forceful policy response to climate change in the near term. What if subsidies for oil and gas suddenly end, for example? Or cars with internal combustion engines are banned altogether? The PRI says that this forceful policy response is “a highly likely outcome, leaving portfolios exposed to significant risk”. 

Climate change funds: annual flows

Shareholders flex their muscles

Divestment is not the only path that climate-friendly investors can take. Some are trying to engage more with companies they own to persuade them to do more to combat climate change.

Retail investors can take action, as well as institutions that are increasingly active. ShareAction, a UK-based shareholder group focusing on environmental, social and governance change at companies, offers training for individual members on how to ask constructive rather than aggressive questions at AGMs, for example. 

It also pools its members to file calls for action at companies, with just 100 shareholders with £100 worth of shares each needed to file a resolution in the UK. In January, ShareAction filed the first ever climate-related shareholder resolution at a European bank, calling on UK-based Barclays to bring its lending in line with the UN Paris Agreement on climate change and publish plans to phase out funding to fossil fuel companies. While the resolution wasn’t passed by shareholders in May, ShareAction argued that the fact it got 24 per cent of the vote with a further 10 per cent abstaining was a “quite huge” level of dissent. 

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This choice between divestment and engagement helps to explain some of the confusion around climate change funds. A majority of so-called ex-fossil fuel funds, for example, do hold companies involved in oil and gas. This is often because fund managers are happy to back companies that are making more of an effort to transition to renewable energy, but still have legacy revenues. Iberdrola or Ene, for example, are often held in climate change funds though still derive significant revenue from emission-generating activities. 

Other investors look beyond the debate between divestment and engagement and prefer to focus on positive solutions to climate change.

When Mr Gates criticised divestment as a climate change investment strategy, he was not advocating specifically for positive engagement; rather, he was encouraging investors to back solutions to climate change. His Breakthrough Energy Fund is backed by various billionaires, from Jack Ma, the Alibaba co-founder, to Richard Branson, the British serial entrepreneur, and it puts money into early stage, innovative companies focused on solutions to climate change. These include new technologies that can bring down the cost of solar and wind power even further; transmission technologies like high-voltage direct current (HVDC), which can transfer wind and solar power from where it’s created to where it’s needed; and smart, flexible power grid technology that can update old creaking systems and enable local producers of electricity to send it back to the grid.

Retail investors cannot access Mr Gates’s fund, which tends to back risky start-ups, but they can opt for clean tech or clean energy funds, which often invest in small companies with growth prospects, albeit with a higher risk profile than established groups.

Moral Money

For news and analysis about the fast-expanding world of socially responsible business, sustainable finance, impact investing, environmental, social and governance trends, visit

With climate change investing in its infancy and interest so high, investment houses have been falling over themselves to launch products. That has led to fears of so-called greenwashing, where funds appear to be more climate-friendly than they really are. Regulators in the UK and Europe are on the watch for these cases. A new set of sustainable investing rules from the European Union that comes into effect next March is intended to clamp down on greenwashing and make ESG funds easier to compare by forcing asset managers to disclose more on their investments.

So investors who want to green their portfolios need to do their homework. But, at least in my personal experience of writing a book on the subject, researching climate change investment involves a lot of interesting questions. It forces you to consider your opinions, whether about divestment, the type of risk you want to be exposed to or the kinds of companies that excite you. Those who undertake a climate risk assessment of their portfolios stand a good chance of emerging not only as more disciplined investors but also, as I did, more hopeful about climate change, given the efforts being made around the world to solve it. 

Alice Ross’s book, Investing to Save the Planet, will be published by Penguin on November 19. 


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Wall Street stocks trail European equities ahead of Fed meeting




Stocks on Wall Street lagged behind European peers ahead of a two-day US central bank meeting that will be closely watched for clues on the future path of monetary policy.

Wall Street’s S&P 500 index was down 0.2 per cent at lunchtime in New York, retreating from an all-time high that the benchmark hit on Friday, while the technology-focused Nasdaq Composite index climbed 0.4 per cent.

Core US government debt sold off on Monday, taking the yield on the benchmark 10-year US Treasury note up 0.03 percentage points to 1.5 per cent. This followed a rally last week in which investors banked on the Federal Reserve looking past high US inflation to maintain its pandemic-era support for financial markets.

The Fed is widely expected to maintain its $120bn of monthly bond purchases when it meets on Tuesday and Wednesday. These asset purchases, which have been followed by rate-setters in Europe and the UK, have lowered the yields on government bonds, reducing corporate borrowing costs and boosting the appeal of riskier assets such as equities.

But after a rapid recovery of the US economy fuelled by coronavirus vaccines and President Joe Biden’s massive stimulus programmes, some analysts see the Fed’s policymakers bringing forward their predictions of the first post-pandemic interest rate rise.

“We expect the Fed to upgrade its outlook for growth and materially revise up the inflation forecast,” Tiffany Wilding, US economist at the bond investment house Pimco, said in a research note. “We think the majority of Fed officials will also pull forward their projections for the first rate hike to 2023 [from 2024].”

Headline US consumer price inflation hit 5 per cent in the 12 months to May. Jay Powell, Fed chair, has maintained that the rises are a temporary effect of the US economy reopening after coronavirus shutdowns. “But others are concerned inflation is more structural,” said Marco Pirondini, head of US equities at Amundi. “I’d say it is 50-50 on either side.”

A rise in used car and truck prices, after a global semiconductor shortage lowered production of new vehicles, accounted for about a third of the increase in May’s CPI, according to the Bureau of Labor Statistics.

US wages could also “go up in a more sustained way”, Pirondini said, after Biden signed an executive order in late April to increase government pay, pressuring private industry to also raise salaries.

Across the Atlantic, the pan-regional Stoxx Europe 600 gained 0.2 per cent to another record high with energy the top-performing sector following a further lift in oil prices.

Brent crude climbed as much as 1.3 per cent on Monday to $73.64 a barrel, a two-year high for the international oil benchmark.

Line chart of Indices rebased showing UK’s travel and leisure stocks trail wider market

Elsewhere in the region, the UK’s travel and leisure companies lagged behind the wider market on reports that the planned lifting of Covid-19 curbs in England on June 21 would be delayed by the UK government.

The news left the FTSE 350 Travel & Leisure sector down 1.4 per cent compared with a rise of 0.2 per cent for the broader FTSE 350 index.

The dollar index, which measures the US currency against peers, dipped 0.1 per cent. The euro was up 0.2 per cent against the greenback, purchasing $1.212. Sterling was up 0.1 per cent at $1.411.

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BNP under fire from Europe’s top wine exporter over lossmaking forex trades




BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.

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Will the Fed dare to mention tapering?




Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

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Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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